Description
The regression is run and the results are reported. You don’t need the excel file. You are also not expected to discuss the regression results.
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Case 1
Part a)
Q = 39.057 – 2.461P
Elasticity = dQ/dpP * P/Q
Calculate the elasticity at the current price of $9.75
Answer question #1 based your result for the elasticity.
Part b)
Two approaches to answer part b:
1. Understanding that Total Revenue is maximum when marginal Revenue is zero:
Demand equation:
Q = 39.057 – 2.462P
Derive the inverse demand:
Re-write the equation above as P as function of quantity.
MR has twice slope as the inverse demand line.
Set MR = 0 and solve for Q and P
Optimal revenue will P *Q ( the new P and Q)
2. Total revenue is maximum when elasticity = -1
-1 = ∆Q/∆P * P/Q
-1= -2.461* P/ (39.057-2.461P)
Solve for P and Q
MMARY OUTPUT
Regression
Statistics
Multiple R
0.97
R Square
0.94
Adjusted R Square
0.94
Standard Error
0
Observations
49
Analysis of Variance
Degrees of Freedom
Sum of Squares
Mean Square
Regression
2
0.00702
0.004
Residual
46
0.00044
0
Total
48
0.00745
Coefficients
Standard Error
t Stat
F
Significance F
370.38
P-value
0
Lower 95%
Upper 95%
Intercept
1.29
0.41
3.12
0
0.46
2.12
LN Price
-0.07
0
-26.62
0
-0.08
-0.07
LN Income
-0.03
0.09
-0.33
0.74
-0.22
0.16
Time Warner Cable Solution to MEMO 1:
Revenue from EPIX
Using the Epix.xls data file, estimation of a linear regression will give the following output:
SUMMARY OUTPUT
Regression Statistics
Multiple R
0.9463
R Square
0.8955
Adjusted R
Square
0.8900
Standard Error
2.6757
Observations
21
ANOVA
df
Regression
Residual
Total
1
19
20
Coefficients
SS
1166.15
136.03
1302.17
Standard
Error
MS
1166.15
7.16
F
162.88
Significance
F
0.000
t Stat
P-value
Lower 95%
Upper
95%
Intercept
39.057
2.015
19.383
0.000
34.840
43.274
Price
-2.461
0.193
-12.763
0.000
-2.865
-2.058
1
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Managerial Economics and
Business Strategy, 9e
Memo 1
To:
Pricing Manager, Tri-State Region
From: Regional Vice President, Tri-State Region
Re:
Revenue from EPIX
We recently added the EPIX Movie Channels as part of a new tier of programming for our digital
video subscribers. The EPIX channels are sold as an add-on package for $9.75 per month, but we
would like to potentially increase our revenue from our subscriber base. Currently we have about
15,059 subscribers, generating monthly revenue of $146,823.
Some have suggested we should cut price, as customers tend to be fairly price sensitive for addon packages. However, in this case, if we lower price for our new subscribers, we really need to
cut it to all of our existing subscribers as well. I have some concerns that lowering price will be
counter-productive.
The marketing department calculated some subscription levels at various price points in this
region, and I need you to perform the analysis. Specifically, I want you to estimate the price
sensitivity of customers at the current price. Please address the following questions: (1) If we
lower the price, do you think this is likely to lead to higher revenue, and (2) how much potential
revenue can we generate and how low should go with our price.
Thanks for your help.
Attachment: Epix.xls
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